Landmark financial markets regulation, the subject of heated debate in the U.S. Senate at press time, went through a similar process in the House of Representatives, which passed its bill last December. The prime mover behind that measure is Barney Frank (D-Mass.), chairman of the House Financial Services Committee. In this May interview with Treasury & Risk senior contributing editor Richard Gamble, Congressman Frank shares his views on the goals of reform, the process of getting there, and what it means for corporate finance, as well as the roles of the Troubled Asset Relief Program, the Federal Reserve, the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Federal Deposit Insurance Corp.

Q: What elements of reform will help corporate treasurers manage counterparty risk?
A: Making sure their counterparties take less risk should help them, but they'll have to do more of their own due diligence and rely less on rating agencies. The root of the problem was bad credit quality. When you can securitize and sell off 100% of the loans you make, you don't worry enough about credit quality. There is a risk retention requirement in the legislation that will make the lenders keep some skin in the game.

Banks and dealers will also face higher capital requirements. AIG was the counterparty from hell because they didn't have to hold capital to back up their credit default swaps and credit insurance. Reform will require every financial entity to have a regulator. Credit default swaps were flying under the radar. Regulators could not see what was there. Soon they will all have to be reported and many of them will have to trade on exchanges.